Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for $57. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors. Harvey’s sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis’s lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson’s purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers: I. Activity data: II. Supplier data: *The Quality Control Department indicates that sampling inspection for the Harvey component has been reduced because the reject rate is so low. Required: 1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain. 2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales.

BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter 11, Problem 10E
Textbook Problem

Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for $57. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors.

Harvey’s sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis’s lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson’s purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers:

  1. I. Activity data:

Chapter 11, Problem 10E, Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the , example  1

  1. II. Supplier data:

Chapter 11, Problem 10E, Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the , example  2

*The Quality Control Department indicates that sampling inspection for the Harvey component has been reduced because the reject rate is so low.

Required:

  1. 1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain.
  2. 2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 11 - What are the four stages of the consumption life...Ch. 11 - Life-cycle cost reduction is best achieved during...Ch. 11 - What is target costing? What role does it have in...Ch. 11 - Explain why JIT with dedicated cellular...Ch. 11 - Explain how backflush costing works.Ch. 11 - Woodruff Company is currently producing a...Ch. 11 - Ventana Company is a car window repair and...Ch. 11 - Deeds Company sells custom-made machine parts to...Ch. 11 - Kagle design engineers are in the process of...Ch. 11 - Hepworth Company has implemented a JIT system and...Ch. 11 - Keith Golding has decided to purchase a personal...Ch. 11 - San Jose Goodwill Bank has been experiencing...Ch. 11 - Classify the following cost drivers as structural,...Ch. 11 - McConkie Company has decided to pursue a cost...Ch. 11 - Jackson, Inc., manufactures motorcycles. Jackson...Ch. 11 - Assign the customer-related activity costs to each...Ch. 11 - The following series of statements or phrases are...Ch. 11 - Assume that a company has recently switched to JIT...Ch. 11 - Prior to installing a JIT system, Barker Company,...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Bunker Company produces two types of glucose...Ch. 11 - Which of the following is a true statement about...Ch. 11 - Which of the following is a true statement about...Ch. 11 - This year, Hassell Company will ship 4,000,000...Ch. 11 - Standard Company has two suppliers: Day and...Ch. 11 - The second stage of customer-based activity-based...Ch. 11 - Evans, Inc., has a unit-based costing system....Ch. 11 - Cortalo, Inc., manufactures riding lawn mowers....Ch. 11 - Moss Manufacturing produces several types of...Ch. 11 - Maxwell Company produces a variety of kitchen...Ch. 11 - Pawnee Works makes machine parts for manufacturers...Ch. 11 - Nico Parts, Inc., produces electronic products...Ch. 11 - Jolene Askew, manager of Feagan Company, has...Ch. 11 - Homer Manufacturing produces different models of...Ch. 11 - Mott Company recently implemented a JIT...Ch. 11 - Southward Company has implemented a JIT flexible...Ch. 11 - Reddy Heaters, Inc., produces insert heaters that...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Describe the transaction recorded.

College Accounting (Book Only): A Career Approach

What adverse effect might be caused by tax incentives to increase saving?

Principles of Macroeconomics (MindTap Course List)

MIRR A project has the following cash flows: This project requires two outflows at Years 0 and 2, but the remai...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What are the major elements of SWOT analysis?

Foundations of Business (MindTap Course List)